(risk management – 5 minute read)
Hi there accounting fans!
Let’s talk about risk.
Many people think of accountants as being risk-averse, but the truth is that taking calculated risks is crucial to the success of any business. After all, if you’re not willing to take risks, you’ll never be able to achieve the big wins that can drive your business forward.
Not all risks are created equal
Risk, from a financial point of view is simply the volatility in your potential earnings (returns). In terms of your business, every decision you make carries with it the risk that it can affect your earnings. Positively and negatively.
There are smart risks, and there are reckless ones. The key to successful risk-taking is to carefully assess the potential rewards and the potential risks, and to only move forward with a risk if the potential rewards outweigh the potential risks.
Taking on a new team member is a risk. Not paying your taxes is also a risk. The difference being that one of them will potentially grow your business and the other will get you into trouble.
Have a risk management plan
This can help you identify and assess potential risks, as well as determine the steps you can take to mitigate those risks. A risk management plan can help you outline the risky decisions you need to take in order to grow your business.
Assign each risky decision two values. One value measures the likelihood of a negative outcome (the likelihood) and the other value measures the impact of a negative outcome (the impact). These values can range from low to high.
Using the example of hiring a new team member. The negative outcome of this is that the new team member costs more than what they can bring in for your business. The likelihood of this happening is low, provided that you have screened your candidates well. The impact of a bad team member is high, as it can affect your cash flow and potentially cripple your business if they do a bad enough job.
This means that you should work hard to reduce the likelihood of a bad outcome by interviewing candidates and making sure you give them enough training on the job.
Every industry faces different risk
It’s also important to have a solid understanding of your business and your industry. This will help you make informed decisions about which risks are worth taking, and which ones aren’t. You may not need to invest in an online chat bot if your business is primarily conducted face to face. You may not need to hire new team members if the industry is moving towards greater automation.
Of course, even with a solid risk management plan in place, there will still be times when things don’t go as planned. That’s okay! It’s all part of the process of running a business. The important thing is to learn from your mistakes and to use them as opportunities to grow and improve.
So don’t be afraid to take risks in your business. Just be smart about it and always have a plan in place to manage any potential risks. And remember, sometimes the biggest risks can lead to the biggest rewards.
Stay positive!